After an exhausting year of disagreements it’s today been announced that BT and the UK telecoms regulator have finally reached an agreement on the future of the operator’s network access division, which means that Ofcom won’t need to force through Openreach’s “legal separation“.
The situation began last February after Ofcom published their Strategic Review (full summary), which aimed to build a new framework for the next decade of telecoms and broadband regulation in the United Kingdom. The review noted that Openreach still had an “incentive to make decisions in the interests of BT, rather than BT’s competitors, which can lead to competition problems” and that the BT had failed to “sufficiently” consult rival ISPs, such as those that piggyback off their network, on future “investment plans that affect them.”
Openreach was also accused of having under-invested in its network to the tune of “hundreds of millions of pounds“. The newly appointed chairman of Openreach, Mike McTighe, recently appeared to support this claim by agreeing that the operator should have invested more into their national infrastructure.
A further Strategic Review update followed in July 2016 (here) and then another one in November 2016 (here). In short, Ofcom aimed to boost competition by giving rivals greater access to BT’s infrastructure and fostering an independent governance structure for Openreach, as well as tougher minimum service quality standards, new consumer protection measures and better information sharing.
However until now there has been no voluntary agreement because of several outstanding issues. One of the roadblocks was BT’s huge pension pot and related deficit, with the operator being concerned about the risks and costs of moving staff and pension liabilities to the “new” company.
The other problem related Ofcom’s demand for Openreach to “become a ring-fenced, ‘wholly-owned subsidiary’ of BT Group, with its own purpose and board members.” As part of that Openreach would be allowed to have confidential discussions with its customers (i.e. without oversight by BT). However no CEO likes to lose full control over part of their business, even if the BT board would still have a say.
Ofcom had warned that it would force its changes through if no agreement could be reached but that is no longer necessary as the two have managed to find some common ground. The regulator said that “BT has agreed to all of the changes needed to address [our] competition concerns.” Openreach will now become a “distinct company with its own staff and management, together with its own strategy and a legal purpose to serve all of its customers equally.”
How the “new” Openreach will work
* Openreach will become a distinct company. Openreach will be incorporated as a legally separate company within BT Group, with its own ‘Articles of Association’. Openreach – and its directors – will be legally required to make decisions in the interests of all Openreach’s customers, and to promote the success of the company.
* The Openreach Board will run the company. The Openreach Board that BT has already established in recent weeks, which has a majority of directors independent of BT, will become the Board of the new company. It will be truly responsible for running Openreach, under a new governance agreement.
* A separate strategy and control over budget allocation. Openreach will develop its own strategy and annual operating plans, within an overall budget set by BT Group.
* Executives will be accountable to the new Board. Openreach’s Chief Executive will in future be appointed by, and accountable to, the Openreach Board. BT Group will be able to veto appointment of the Openreach CEO, but only on notification to Ofcom. The Openreach Chief Executive will then be responsible for other executive appointments, and will report to the Openreach Chair – with a secondary accountability to the Chief Executive of BT, limited to necessary legal, fiduciary or regulatory obligations.
* Staff will work for Openreach. The new Openreach will directly employ all its 32,000 staff, who will be transferred across from BT. This will allow Openreach to develop its own distinct organisational culture.
* Assets will be controlled by Openreach alone. Openreach will have control of those assets – such as the physical access network – required to deliver on its purpose. The Openreach Board will make decisions on building and maintaining these assets: BT will hand these powers to Openreach, while retaining a title of ownership.
* Consultation and confidentiality for Openreach’s customers. Openreach will be obliged to consult formally with customers such as Sky Broadband, TalkTalk and Vodafone on large-scale investments. In future, there will be a ‘confidential’ phase during which customers can discuss ideas without this being disclosed to BT Group, as well as further protections for confidential customer information.
* Distinct branding. BT will be removed from Openreach branding, to reflect these changes and the company’s greater independence.
On BT’s Pensions it’s noted that to implement this agreement with the “smallest possible effect” will require that the existing Crown Guarantee (i.e. this requires the Government to foot the bill in the unlikely event that the company should be wound up) would need to be maintained for Openreach staff who are members of BT’s pension scheme. This will require the Government to change their existing legislation.
The deal also means a change for Northern Ireland. Historically, Openreach has existed in Great Britain, but not in Northern Ireland. Instead, BT Northern Ireland has adapted its processes to closely reflect those of Openreach, which Ofcom says is an “arrangement that has generally worked well“.
However today’s deal will extend the benefits of the Openreach changes to BT Northern Ireland – including greater independence, confidentiality and independent branding. BT Northern Ireland will also remain able to take account of specific local circumstances and opportunities.
Sharon White, Ofcom Chief Executive, said:
“This is a significant day for phone and broadband users. The new Openreach will be built to serve all its customers equally, working truly independently and taking investment decisions on behalf of the whole industry – not just BT.
We welcome BT’s decision to make these reforms, which means they can be implemented much more quickly. We will carefully monitor how the new Openreach performs, while continuing our work to improve the quality of service offered by all telecoms companies.”
Gavin Patterson, BT Chief Executive, said:
“I believe this agreement will serve the long-term interests of millions of UK households, businesses and service providers that rely on our infrastructure. It will also end a period of uncertainty for our people and support further investment in the UK’s digital infrastructure.
This has been a long and challenging review where we have been balancing a number of competing interests. We have listened to criticism of our business and as a result are willing to make fundamental changes to the way Openreach will work in the future.”
Ofcom states that their new model for Openreach will also be supported by “careful, continual monitoring to ensure it is effective“. As part of this, BT will provide Ofcom with additional transparency on the nature of interactions between the new Openreach and the rest of BT Group.
The agreement will also necessitate the transfer of around 32,000 employees, under TUPE regulations, which will be one of the largest such transfers in UK corporate history. It will take place once the agreement has been implemented and pension arrangements are in place for these employees. Under the agreement, Openreach will manage and operate its assets and trading but ownership of those assets and trading will remain with BT.
We should point out that Openreach has already begun to introduce many of the proposed changes, such as by establishing a new independent board and separating some of their other work practices. However there may be some disappointment that today’s deal does not appear to have encouraged a greater roll-out of “ultrafast” FTTP services than the currently proposed 2 million premises by 2020 (mostly businesses and new builds).
It’s important to recognise that most of major changes under this agreement won’t have a huge impact on consumers in the short to medium term. However, over the longer term, Ofcom hopes that fostering greater independence and competition at the infrastructure level will deliver a more diverse and flexible market for better / faster digital connectivity.
The Government’s recent decision to push fresh investment towards alternative ultrafast fibre optic broadband providers (here and here) appears to form part of the same approach, although it takes time to grow new networks and copper line based technology will still be around for a long time to come.
Crucially today’s changes aren’t a magic quick-fix for the economic challenges of getting such connectivity into rural areas and indeed such locations will, with a few exceptions, remain last on the list to benefit. But given enough time even they may benefit.
The commitments that BT has notified to Ofcom are available on this page http://www.btplc.com/UKDigitalFuture/ and the regulator has said that they will shortly publish further detail on how today’s agreement addresses their competition concerns, together with proposals to release BT from its previous undertakings around Openreach once the new commitments are fully in place.
It may be worth keeping tabs on BT Group’s share price this morning..
The first comment on today’s deal has come from Sky (Sky Broadband), although we’ve put out requests from quite a few of the big players so expect a lot more to follow.
A Sky spokesperson said:
“This is a welcome step that we have long called for on behalf of our customers.
A more independent Openreach is a step towards delivering better service to customers and the investment that the UK needs.
It’s important that today’s agreement is now implemented by BT in good faith and without delay.”
Now one from TalkTalk.
Dido Harding, TalkTalk’s CEO, said:
“We welcome the agreement to create a legally separate Openreach. The new company will be better placed to deliver the improved investment and service that consumers and businesses deserve. This deal will require robust Ofcom monitoring and enforcement to ensure it delivers the improvements the regulator expects.
We hope this is the start of a new deal for Britain’s broadband customers, who will be keen to see a clear timetable from Openreach setting out when their services will improve.”
Mark Collins, CityFibre’s Director of Strategy and Policy, said:
“The real story here is the UK’s shocking ‘fibre gap’. Whilst it is welcome that these time-consuming negotiations seem to be at an end, there is nothing in this announcement to suggest Openreach will now start to build the fibre infrastructure this country needs. Ofcom’s focus needs to shift to encouraging alternative fibre builders to do the things Openreach can’t or won’t do – whatever its legal status.
CityFibre is well placed to take on that challenge and to meet Ofcom’s strategic objective of reducing the UK’s reliance on Openreach to get the job done. The substantial Government funding for fibre announced in the budget this week will help to accelerate our own full fibre rollout programme.”
We wouldn’t describe £600m as “substantial Government funding” when talking about FTTP/H networks because it could take tens of billions to blanket the country with it. A good improvement, but a lot more will be needed.
No beating around the bush from Virgin Media today.
Tom Mockridge, CEO of Virgin Media, said:
“Openreach is just the same old snail’s paced network with a new shell. Call it what you like but it’s still BT, four times slower than Virgin Media.”
Oh and they also tweeted this..
— VirginMediaCorporate (@VirginMediaCorp) March 10, 2017